MODULE 1: CONSULTING AND INVESTING

What is Estate Planning?

Estate planning is the preparation of tasks that serve to manage an individual's asset
base in the event of their incapacitation or death. The planning includes the bequest of
assets to heirs and the settlement of estate taxes. Most estate plans are set up with
the help of an attorney experienced in estate law.

Estate Planning Explained

Estate planning involves planning for how an individual’s assets will be preserved,
managed, and distributed after death. It also takes into account the management of an
individual’s properties and financial obligations in the event that they become
incapacitated.

Assets that could make up an individual’s estate include houses, cars, stocks, paintings,
life insurance, pensions, and debt. Individuals have various reasons for planning an
estate, such as preserving family wealth, providing for surviving spouse and children,
funding children or grandchildren’s education, or leaving their legacy behind to a
charitable cause. The most basic step in estate planning involves writing a will. Other
major estate planning tasks include the following:

 Limiting estate taxes by setting up trust accounts in the name of beneficiaries

 Establishing a guardian for living dependents
 Naming an executor of the estate to oversee the terms of the will
 Creating or updating beneficiaries on plans such as life insurance, IRAs and
401(k)s
 Setting up funeral arrangements
 Establishing annual gifting to qualified charitable and non-profit organizations to
reduce the taxable estate
 Setting up a durable power of attorney (POA) to direct other assets and
investments

How Estates Are Managed

In almost all cases, estates are divided between members of the deceased's family.
This passage of wealth from one generation of a family to the next has a tendency to
entrench income in certain social classes or families. Inheritance accounts for a
massive proportion of total wealth in the United States and around the world and is in
part responsible for persistent income inequality (though there are, of course, many
other factors).

Partially as a response to the stagnation of wealth movement as a result of inheritance,

most governments require those in line for an inheritance to pay an inheritance
tax (estate tax) on the estate. This tax can be very large, sometimes requiring the
beneficiary to sell some of the inherited assets to pay the tax bill. In the United States, if
the majority of an estate is left to a spouse or a charity, the estate tax is generally lifted.

It is generally advisable for both the individual drafting the will and the beneficiaries of
an estate to employ the services of estate attorneys. Inheritance taxes are notorious for
their complexity and exorbitance, and the use of an attorney helps ensure that your
inheritance taxes are paid correctly. On the drafting end, several measures can be
taken to minimize the amount of tax one's beneficiaries will have to pay, like setting up
trusts.

What Is a Will and Why Do I Need One Now?

A will is a legal document that sets forth your wishes regarding the distribution of
your property and the care of any minor children. If you die without a will, those
wishes may not be carried out.1 Further, your heirs may be forced to spend
additional time, money, and emotional energy to settle your affairs after you're
gone
Wills can vary in their effectiveness, depending on the type, though no document will
likely resolve every issue that arises after your death. Here's what you need to know
about these vital documents.

Why You Should Have a Will

Some people think that only the very wealthy or those with complicated assets need
wills. However, there are many good reasons to have a will.

 You can be clear about who gets your assets. You can decide who gets what
and how much.
 You can keep your assets out of the hands of people you don't want to have
them (like an estranged relative).
 You can identify who should care for your children. Without a will, the courts will
decide.
 Your heirs will have a faster and easier time getting access to your assets.
 You can plan to save your estate money on taxes. You can also give gifts and
charitable donations, which can help offset the estate tax.
A Written, Witnessed Will Is Best

To maximize the likelihood that your wishes will be carried out, create what's known as
a testamentary will. This is the most familiar type of will; you prepare the document and
then sign it in the presence of witnesses. 1 It's arguably the best insurance against
successful challenges to your wishes by family members or business associates after
you die. You can write one yourself, but for greater insurance, have it prepared by a
trusts and estates attorney.

Other Types of Inheritance Wills

While a testamentary will is likely your best bet, there are several other types of wills
that get varying degrees of recognition.

 Holographic wills
Wills that are written and signed by the testator but not witnessed are known
as holographic wills—from the less common secondary meaning of the word holograph,
meaning a document hand-written by its author. 2 Such wills are often used when time is
short and witnesses are unavailable, for example when the testator is trapped in a life-
threatening accident.

Holographic wills are not recognized in some states, however. In states that do permit
the documents, the will must meet minimal requirements, such as proof that the testator
actually wrote it and had the mental capacity to do so. Even then, the absence of
witnesses often leads to challenges to the will's validity .

 Oral wills
Least widely recognized are oral wills, in which the testator speaks his or her wishes
before witnesses. Lacking a written record, or at least one prepared by the testator, oral
wills are not widely recognized by courts. 3

 Pour-over wills
Another type of will, a pour-over will is used in conjunction with creating a trust into
which your assets flow. (See "Wills and Trusts" below.)

 Mutual wills
This type of will is usually executed by a married or committed couple. After one party
dies, the remaining party is bound by the terms of the mutual will.

Mutual wills can be used to ensure that property passes to the deceased’s children
rather than to a new spouse. Because of state differences in contract law, a mutual will
should be established with the help of a legal professional. Though the terms sound
similar, a mutual will should not be confused with a joint will.

What Does a Will Cover?

A will primarily lets you direct how your belongings—such as bank balances, property,
or prized possessions—should be distributed. If you have a business or investments,
your will can specify who will receive those assets and when.

A will also lets you direct assets to a charity (or charities) of your choice. Similarly, if you
wish to leave assets to an institution or an organization, a will can assure that your
wishes are carried out.

While wills generally address the bulk of your assets, some aren't covered by their
instructions. Those omissions include payouts from the testator's life-insurance policy.
Since the policy has specified beneficiaries, those individuals will receive the proceeds.
The same will likely apply for any investment accounts that are designated as "transfer
on death."

There's a key exception: If the beneficiaries of those assets predeceased the testator,
the policy or account then reverts to the estate and is distributed according to the terms
of a will or, failing that, by a probate court—a part of the judicial system that primarily
handles wills, estates, and related matters.

In addition, the will may not offer the last word on how assets that were jointly owned
within a marriage are dealt with. Most states have elective-share or community
property laws that prevent people from disinheriting their spouses. If a will assigns a
smaller proportion of such assets to the surviving spouse than state law specifies, which
is typically between 30% and 50%, a court may override the will.

In addition to directing your assets, a will states your preferences for who should take
over as guardian for your minor children in the event of your death.

Wills and Trusts

A will is also useful even if you have a trust—a legal mechanism that lets you put
conditions on how your assets are distributed after you die and, often, to minimize gift
and estate taxes. That's because most trusts deal only with specific assets, such as life
insurance or a piece of property, rather than the sum total of your holdings.

You might also consider setting up a trust as a way to provide for a beneficiary who is
underage. Once the beneficiary is deemed capable of managing their assets, they will
receive possession of the trust.
Even if you have what's known as a revocable living trust into which you can put the
bulk of your assets, you still need what's known as a pour-over will. In addition to letting
you name a guardian for your children, a pour-over will ensures that all the assets you
intended to put into the trust are put there, even if you fail to retitle some of them before
your death.

Any assets that are not retitled in the name of the trust are considered subject to
probate. As a result, if you haven't specified in a will who should get those assets, a
court may decide to distribute them to heirs whom you may not have chosen.